CHP: Obstacles and Opportunities

FROM THE FEBRUARY ISSUE: Generating heat and power on-site saves money and lowers carbon intensity, but has barriers to success.
By Joe Leo | January 17, 2018

With the recent explosion of plant expansion projects in the ethanol industry, many producers likely are considering construction of combined-heat-and-power (CHP) projects and other alternative forms of power generation to supplement the steam available at their plants. Interest is high in CHP projects in particular, as they provide the most direct benefits to ethanol producers. Current regulatory regimes, however, present several obstacles. 

CHP facilities use natural gas to fire a turbine, which generates electricity. The byproduct of this process is heat, which can be used to create steam for an industrial facility, such as an ethanol plant.  According to the U.S. Department of Energy, separately producing heat and power has an efficiency of about 45 percent, while CHP can operate at 80 percent or greater, offsetting fuel and utility emissions, while lowering the carbon intensity score and saving money. This renewable energy generation also can continue to support energy independence, which has been a hallmark of the ethanol industry since the turn of the century. But, as with all new technologies, inherent and long-standing advantages of the status quo must be combated to expand CHP implementation.    
The Rate
One major obstacle is securing a rate for the electricity generated, which can create a revenue source if the electricity will be sold to the power utility. The Public Utility Regulatory Policies Act of 1978 was passed, in part, to encourage energy cogeneration—electricity generated at or near the location where it’s used. PURPA requires large utilities to purchase electricity generated by cogeneration plants at the utility’s avoided cost rate—the additional costs the electric utility would incur if it generated the required power itself or could purchase the power from another source. The full avoided cost of energy is not intended to simply be an analysis of the utility’s marginal cost to generate power. Instead, the avoided cost should focus on all the utility’s costs avoided by the additional power generation, including transportation and delivery of power, along with other services provided by the utility to its customers. The complexity of determining these avoided costs increases with all the factors PURPA requires utilities to consider. As a result, the avoided cost rates in most states fail to adequately capture the full avoided cost, which results in CHP and other alternative sources of power generation being less competitive in the market.      

Enforcement authority under PURPA has been granted to the states, so each state has its own authority to evaluate the utility’s avoided cost rate. As a result, CHP projects are feasible and profitable in some states, but not in others. Utilities are monopolies, so each state has a framework in place to level the competitive playing field between the utilities and their customers. But this playing field is not always sufficiently leveled by the states, and utilities are not interested in losing market share by allowing their customers to generate power.

The utilities also benefit from the method they use to establish avoided cost rates. The process relies on the states to make complicated calculations and decide whether the avoided cost rates are accurate, making judgment calls along the way. So electrical users and those who operate CHP facilities need to be involved and advocate for higher avoided cost rates.

For example, in the past three years in Iowa, the avoided cost rate published by one utility has been cut in half. This reduction came at a time when the utility was building its own alternative energy projects for a cost significantly higher than its published avoided cost rate.

Another obstacle to PURPA is the fact that the rates of rural electric cooperatives (REC), which provide electricity in many areas where ethanol plants are located, are not subject to state regulatory authority. These RECs generally have higher electricity costs, and, while they have a purchase obligation under PURPA, they generally set their own avoided cost rates, which might also be quite low. To challenge avoided cost rates established by RECs, utility customers must file an action with the Federal Energy Regulatory Commission. The process is time consuming and costly, so REC customers often decide not to challenge, resulting in good projects not being constructed.

To avoid some of the obstacles to a CHP project, an ethanol plant could create a micro-grid. Depending on the size of the CHP facility, the ethanol plant might be able to disconnect completely from the electrical grid, allowing it to produce its own electricity and steam. This structure avoids many of the issues related to selling power to the utility, but the avoided cost rate could still come into play in the event the ethanol plant generates more electricity than it can use, thereby requiring the ethanol plant to sell the electricity back to the utility. Micro-grids also allow a facility to avoid risks inherent to the electrical distribution system, including profit loss from weather disruptions on the electrical grid. Many large power users—including industrial operations, military bases and data centers—are avoiding this risk by creating micro-grids.

We are living in a time where the power market is changing. Gone are the days when our electricity is solely generated by coal-fired power plants owned by power utilities. With the emergence of alternative forms of power generation, including solar, wind and CHP, a number of opportunities to expand our power portfolio are out there. These alternatives allow us to improve reliability of the electrical grid, anticipate and react to changing fuel costs and improve the environmental impact of power generation. But the rules are changing to accommodate the changing market, and if we stay on the sideline, they likely will be changed in favor of the utilities.

Author: Joe Leo
Attorney, BrownWinick Law Firm